Saving economies from economists

It’s not the best of times for economists.

They have no sure solutions to offer to the conundrums facing both rich countries and the emerging economies of the world. To make things worse, they themselves are a divided, squabbling lot.

Market crashes

Nowhere is the economics profession as highly regarded and paid as in the US. Have they got value for money? Four market crashes and one big economic crash in 20 years. Or about once in five years. Can the system take it?

It’s not just the 2008 crash, which continues to hobble the American economy. Even before, the US committed the cardinal sin of allowing completely free rein to the financial sector. The 1987 stock market meltdown was caused by the esoteric technique of ‘portfolio insurance’, which failed just when it was most needed, the 1998 collapse was thanks to LTCM, a Nobel Prize winners-led hedge fund, the 2000 implosion of the dotcom bubble was the result of Internet start-up valuations going crazy and of course the latest is the bust of the housing and mortgage markets.

The key question is whether these could have been avoided.

Undoubtedly. One, if the market players involved had a better grasp of their vulnerability to ‘tail’ risk, (i.e., catastrophic events outside the normal range) and, two, if regulators, including the central bank, had better sense. No sophisticated mathematical models, churned out by the dozens in the Ivy Leagues, were necessary.

That’s not putting it too strongly. For, Alan Greenspan, then Federal Reserve Chairman, grafted his guru, Ayn Rand’s espousal of all government and regulation as evil on to his job. Astonishing, foolish confidence. He was lucky with the 1987 and LTCM rescues and should have been on guard thereafter.

Ben Bernanke, his successor, is no blind adherent of laissez faire, like Greenspan. Unfortunately he is in the wrong place at the wrong time.

The rot of sub-prime mortgages and credit derivatives had almost fully set in by the time he took over.

Economics has become an intellectual casino and does not deserve to be characterised as a ‘science’. A ‘science’ tests theories and experiments to accurately predict outcomes. Think physics, chemistry. Economics hardly qualifies, having got things wrong more often than not. And with disastrous consequences for all.

Solving problems

The pity is the scientific, technological and management prowess of America is awesome. And the mammoth scale and size of everything. So is its intellectual firepower. Consider, that, in a just a few square miles in Silicon Valley, you have the world’s most valuable companies — Apple, Google and Facebook.

So solving its economic problems should be passé provided economists are kept out.

There’s no absolutely no reason why an enlightened and brilliant group of physicists, technologists and doctors, shorn of ideology and vested interests, can’t come up with a plan.

One of their first ideas might to be to dismantle the noise and risk-creating products and activities of Wall Street institutions in financial markets. And there lies the rub.

‘Value subtracting’ economists are ubiquitous everywhere. The sooner they are replaced with common sense from the intellectually honest and capable from different professions, the better.

(The author is a Chennai-based financial consultant)

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